Last week I talked about how discipline — including discipline to a systematic investment strategy — takes no talent.
You need to maintain the proper mindset, execute on all trade signals and avoid making unforced errors — all of which require discipline. But you don’t need to be born a talented trader to succeed with a systematic, rules-based approach to investing.
I got the idea for that discussion from Chenmark Capital Management. It’s a small private-equity shop that wrote on the Miami Dolphins’ “Takes No Talent” mantra and how it relates to what we do as investors.
Discipline is important. If you can’t follow a systematic strategy with discipline, why even bother with the “systematic way” in the first place, right? That should be obvious to most folks.
But what isn’t as obvious is why even bother with the “systematic way” in the first place?
Here, too, the folks at Chenmark got me thinking on why I’m a systematic investor…
The Perfect Marathon
In their latest note, Chenmark described the efforts of Eliud Kipchoge in his aim to run a marathon in under two hours, which has been called the “last barrier of modern athletics.”
He did it. In one hour, 59 minutes and 40 seconds, to be exact.
But the interesting nugget of wisdom I carried away from the story was what it took to accomplish the goal. Essentially, the “perfect conditions” that were highly orchestrated by his support team:
“He ran behind an electric timing car driving 4:34 per mile and with a flock of rotating pacesetters (35 on the course, six on reserve) who happened to include some of the best distance runner in the world…
Those pacemakers formed a protective, aerodynamic pocket around Kipchoge, five of them running in front in an open-V formation and two in the back. They knew exactly where to run thanks to a pattern of thick, green laser beams projected onto the street by the timing car.
A team member on a bicycle periodically pedaled into the pack to deliver Kipchoge a carbohydrate-heavy cocktail of gels and fluids.”
Now, I don’t mean to take anything away from Mr. Kipchoge nor his undeniably impressive feat. I personally couldn’t run a marathon in under four hours, even if blessed with those “perfect conditions.”
But I hope it’s easy to realize that Mr. Kipchoge’s “perfect conditions” are in no way, shape or form the “normal” or typical conditions that most marathon runners encounter in an average race.
And I hope you’re with me in believing that “normal conditions,” whether it be in a marathon, or life, or investing — are in fact consistently imperfect.
Nagging Partners and Crying Babies
One of my early formative experiences with discretionary trading (i.e. anything not systematic) was on the desk of a proprietary foreign currency fund under one of J.P. Morgan’s legendary forex traders.
The guy — we’ll call him “Rick” — was highly accomplished, but he made all of his trade by gut feel.
He was disciplined. He read 10-plus hours of news and analysis every day. But ultimately, he just pulled the trigger when it felt right, not when a rules-based systematic strategy triggered a crystal-clear buy or sell signal.
By and large, that approach worked for Rick. But you could still tell when he was having an off day…
His wife would call more often than usual, nagging him about something he was supposed to have done at the house. Or she’d stop by the office with their baby, who typically came in quietly and exited screaming. Or his daughter would stop in after school and remind Rick he was coaching her soccer scrimmage that afternoon.
It was always something personal that threw Rick off his game. Something in life, not the markets, would distract him… annoy him… anger him… or otherwise break his robot-like concentration on his Bloomberg and order buttons.
Under “perfect conditions,” Rick had a Midas touch. But he struggled when anything disrupted his environment or emotions. He was highly temperamental and fragile, if you will.
The Solution Is Systematic
The greatest value in a systematic investment strategy is that it tells you exactly what to do.
It doesn’t matter if you’re having a good day or a bad day, you just check your systematic strategy and do as it says to do.
It doesn’t matter if your partner calls to nag on you, or if your child is going through a scary medical issue. It doesn’t matter if you’re stressed out by tax season, or if you have seasonal affective disorder, or if you have a hangover from the game the night before, or if someone cut you off on your way into work…
If you follow a systematic investment strategy, you can be having the worst day in your life and still make the right moves with your money. It’s simple: you just follow the signals!
This prevents you from getting too scared or conservative when you’re feeling bummed out about something. It also prevents you from getting too bold and overconfident when you’re feeling especially happy, or even manic.
The point is, it’s absolutely normal to go through emotional ups and downs, and to endure distractions and challenges in your personal life, on a routine basis.
Those are normal life conditions, I think you’ll agree. But they’re far from “perfect conditions” for making good investment decisions. And that’s why so many folks fail to succeed at discretionary investing. There are simply too many distractions and emotional pulls in our daily lives for us to make consistently sound investment decisions, based on our “gut feel.”
The systematic investment approach doesn’t actually engineer “perfect conditions,” as Mr. Kipchoge’s support team did, but it does acknowledge that the expectation of perfect conditions is unreasonable, and it works to protect you from the emotional whims you routinely experience under life’s “typical” conditions.